Looking for a new investment to consider? Discover Financial Services (DFS -2.60%) recently revealed three reasons why it should be on your radar.
Remarkable profitability
One of the critical considerations with any investment is a company's profitability relative to its peers.
Two key ways to measure this for banks and credit card companies such as Discover is net interest margin (the difference between what it receives from its loans versus what it pays out on from borrowing) and return on average assets (how efficiently it is able to generate profit based on its size).
Discover was at or near the top of the class in 2013 on those two essential measures of profitability when compared against American Express (AXP -0.84%), Citigroup (C -1.09%), and others peers in the credit card industry:
The difference between Citigroup and Discover here is even more staggering when you consider that they are essentially neck and neck on net interest margin, but Discover far outpaces its rival in return on assets.
Tremendous growth and safety
The natural questions then become, with it being so profitable in 2013, how did it fare during the financial crisis, and is its profitability driven by risky loans? It turns out, Discover not only outpaced all of its peers in growing its credit card loans after the financial crisis, but did so in a much safer manner:
Discover's credit card portfolio has more than doubled from $20 billion in 2008 to $51 billion in 2014, even as its peers have continued to see theirs decline.
But with any growth -- especially in credit cards -- there is always concern that it results from taking on more risk. However, Discover continues to have an incredibly safe customer base by charging off fewer loans relative to its peers.
When a financial institution can outpace its peers in loan growth in a safe and secure manner, investors should take notice.
A powerful brand customers love
Moving beyond the balance sheet and income statement, Discover also revealed it has the highest brand awareness, along with the most loyal customers:
More people are familiar with Discover than American Express, which is astounding when you consider that it had just $717 million in marketing expenses in 2013, versus $3 billion at American Express. And it far outpaces Citigroup and other banks commonly thought to be better known.
When you add in its remarkably loyal customers, who are likely to have their cards for 50% longer with Discover than its peers, this shows it isn't simply good at marketing, but actually in retaining its customers. This is part of the reason why it has been so profitable through the years.
The takeaway
When you combine tremendous profitability, great growth, limited risk, loyal customers, and a powerful brand, Discover fits the bill as a buy today.
